Taxation generally has nasty side-effects, because when you tax something people tend to do/produce/buy less of it. These tax-induced changes in bahaviour not only lead to inefficiency, but they also cause the resulting tax yield to be lower compared to what it would have been with no change in behaviour. Modern governments tend to treat these tax-induced behavioural changes as fair-play, but the pioneers would apparently have none of it:

During the various reins of the Egyptian Pharaohs tax collectors were known as scribes. During one period the scribes imposed a tax on cooking oil. To insure that citizens were not avoiding the cooking oil tax scribes would audit households to insure that appropriate amounts of cooking oil were consumed and that citizens were not using leavings generated by other cooking processes as a substitute for the taxed oil.

[The Health Utility Index (HUI)]: The index [...] provides a description of an individual's overall functional health based on eight attributes - vision, hearing, speech, mobility (ability to get around), dexterity of hands and fingers, memory and thinking, emotion, and pain and discomfort. The HUI maps the responses into a scale ranging from negative to 1 (where one means perfect health and negative means worse than death).

With the exception of pain, how can any of the other attributes be 'worse than death'?

Since it's invention in 1989, Apple-Cinnamon Cheerioshave added about 0.002 percent to our welfare, meaning that if they had never been introduced, then we would need 0.002 percent extra income to feel just as well off.

What about the personal computer? Since its introduction in 1977, the price of a PC, when advancements are factored in, has dropped 700 times, according to Jeremy Greenwood of the University of Pennsylvania and Karen A. Kopecky of the University of Western Ontario.

The two researchers say that our welfare has been improved by about 4 percent thanks to the PC revolution -- or about 2,000 times more than Cheerios. (pdf)

This is from Odd Numbers, Portfolio's economics blog starring Zubin Jelveh. One for your RSS reader or bookmarks folder.

London (Reuters): Premier League football club Arsenal [...] saw revenues shoot up 45 percent [...] However pretax profit dropped to 5.6 million pounds from 15.9 million a year ago after swallowing a one-off refinancing charge on the money it borrowed to build [its] 60,000-seat ground.

The result would have been worse but for the big money sale of talismanic striker Thierry Henry to Barcelona.

Thierry Henry was sold for £16m, translating to about £11m after deducting tax. This is not a trivial amount: it corresponds to about 200% of Arsenal's reported post-tax profits. It suggests that Arsenal is structurally loss-making and would need to raise around £10m from player sales every year to remain solvent.

Alas, Reuters got their story wrong. Arsenal sold Henry after the end of the May accounting period so the revenue from his sale will show up at next year's accounts. Furthermore, the provisional accounts have a whole section listing the players bought and sold, mentioning any sales since the end of the accounting period in a separate section - so we are talking about particularly sloppy research on this one. And to think that Reuters are supposed to be experts on finance reporting.

Thanks goes to one of my most loyal readers for the pointer and analysis.

The Canadian dollar hit parity with the US dollar (CADUSD) for the first time in 31 years on Thursday and is expected to remain strong, delighting Canadians used to being mocked for their “northern peso.”

The last time the two currencies were at par was in November 1976, the year Montreal hosted the Summer Olympics and Pierre Trudeau was prime minister

In the course of history a large number of politicians has been assassinated. A rational choice analysis is used to distinguish the expected marginal benefits of killing, and the marginal cost of attacking a politician. The comparative analysis of various equilibria helps us to gain insights into specific historical events. The analysis suggests that – in addition to well-known security measures – an extension of democracy, a rule by a committee of several politicians, more decentralization via the division of power and federalism, and a strengthening of civil society significantly reduce politicians’ probability of being attacked and killed.

Why do we need a carbon tax?[...] in a paper I (Steven Levitt) was proud to publish in the Journal of Political Economy, [Edlin and Mandic]argue convincingly that each extra driver raises the insurance costs of other drivers by about $2,000. Their key point is that, if my car is not there to crash into, maybe a crash never happens. They conclude that the appropriate tax would generate $220 billion annually.

How about global warming? Every gallon of gas I burn releases carbon into the atmosphere, presumably speeding global warming. [...] the social cost of a ton of carbon put into the atmosphere is about $43. [...] If that number is right, then the gas tax needed to offset the global warming effect is about 12 cents per gallon. [...] that implies a $20 billion global warming externality. So relative to reducing congestion and lowering the number of accidents, fighting global warming is a distant third in terms of reasons to raise the gas tax. More here.

Fantasy Journals:Create the rules and web infrastructure for a game of ”fantasy journals” analogous to the fantasy baseball and fantasy football leagues that are so popular among sports fans. Scientists could draft papers for their own fantasy journal, and then compete to see whose journal was most successful. Such a game would be great fun to play e.g. in a conference setting or in a research group, and it would also potentially be a source of valuable bottom-up bibliometric tagging information. More here, via MR.

An out-right weirdNYT article on unhappy millionaires. Craig's commentary is spot on. And if you are looking for the policy implications, please tax the hell out of unhappy millionaires: reading about their views on life does horrible things to my utility.

Lifesharersis a legal non-monetary organ market, inspired by Alex Tabarrok's "no-give no-take" proposal. LifeSharers offers a very compelling trade: you agree to donate your organs when you die, and in exchange you'll increase your chances of getting a transplant should you ever need one to live.An interesting idea that mainly serves to circumvent the legal restrictions on organ sales; at any rate, don't expect your odds to improve very much (Lifesharers' membership is around 10,000 - have a look at the relevant mortality and organ donation statistics for the U.S. and do the maths). Also, while 'organs for organs' has a certain intuitive appeal, it is no more fairer than a 'bananas for bananas' arrangement - and considerations of 'fairness' tend to be a bit more complicated than that. Assuming full legalisation of organ markets is out of the question, a system of presumed consent seems to me the only realistic way forward.

[W]hether police officers are motivated by fund-raising as well as safety when writing traffic tickets— has been examined [in the] “Political Economy at Any Speed: What Determines Traffic Citations?” The authors found a statistical link between a town’s finances and the likelihood that its police officers would issue a speeding ticket. The details are a little sticky, but they show that tickets were issued more often in places that were short on cash, and that out-of-towners received tickets more often than drivers with local addresses. The NYT has more.

Secrets Revealed: How Magicians Protect Intellectual Property (free access): Intellectual property scholars have begun to explore the curious dynamics of IP's negative spaces, areas in which IP law offers scant protection for innovators, but where innovation nevertheless seems to thrive. [...] This paper presents a study of one such negative space [...] the world of performing magicians. This paper argues that idiosyncratic dynamics among magicians make traditional copyright, patent, and trade secret law ill-suited to protecting magicians' most valuable intellectual property. Yet, the paper further argues that the magic community has developed its own set of unique IP norms which effectively operate in law's absence.

This is good news:The spaghetti-like nightmare that forms many users' collection of phone chargers, headset connectors and data cables could be set to end after a major mobile industry forum agreed to standardise on one type of connector.

On Monday the Open Mobile Terminal Platform (OMTP) -- a forum dominated by networks but including manufacturers such as Nokia, Samsung, Motorola, Sony Ericsson and LG -- announced that its members had agreed on micro-USB as the future common connector.

There's not much point abstaining from setting a common standard when there is hardly any prospect of technological innovation in a given area; this development is welcome and long overdue.

I have only one firm belief about the American political system, and that is this: God is a Republican and Santa Claus is a Democrat.

God is an elderly or, at any rate, middle-aged mate, a stern fellow, patriarchal rather than paternal and a great believer in rules and regulations. He holds men strictly accountable for their actions. He has little apparent concern for the material well-being of the disadvantaged. He is politically connected, socially powerful and holds the mortgage on literally everything in the world. God is difficult. God is unsentimental. It is very hard to get into God's heavenly country club.

Santa Claus is another matter. He's cute. He's nonthreatening. He's always cheerful. And he loves animals. He may know who's been naughty and who's been nice, but he never does anything about it. He gives everyone everything they want without thought of a quid pro quo. He works hard for charities, and he's famously generous to the poor. Santa Claus is preferable to God in every way but one: There is no such thing as Santa Claus.

I’ve been dealing with these big mathematical models of forecasting the economy, and I’m looking at what’s going on in the last few weeks. … If I could figure out a way to determine whether or not people are more fearful or changing to more euphoric, and have a third way of figuring out which of the two things are working, I don’t need any of this other stuff (I can't begin to imagine what this other stuff is. It sure is strong, because this sentence ain't makin' sense). I could forecast the economy better than any way I know.

The trouble is that we can’t figure that out. I’ve been in the forecasting business for 50 years. … I’m no better than I ever was, and nobody else is. Forecasting 50 years ago was as good or as bad as it is today. And the reason is that human nature hasn’t changed. We can’t improve ourselves. (what? what does human nature have to do with this? Had it changed to something completely different it would make forecasting easier?)

Three things I need to get off my chest.

1. People just don't know when to quit. It's as true of rock bands as it is of decorated statesmen, scientists and other learned types. Athletes fare much better in that respect, something which can be attributed to the more objective measures used to measure their performance.

2. What's this thing with book deals? I mean, look at Musharraf, look at Campbell, look at Greenspan now. It's always the same recipe: write a massive tome with very little content and throw in a couple of mini revelations/ controversies that will get the book mentioned in the press. Many people will buy it, few will read it, and none will be any the wiser for it. I admit that these deals can be lucrative. But don't these larger-than-life characters feel a bit more special than that?

3. Setting interest rates is the easiest job in the world. Promise. All you need to do is read the financial press from time to time (say 10 minutes on the internet every couple of months) and that's it. Assuming you don't do anything completely bonkers (I said, do spend your 10 minutes on the internet before going to them rate-setting meetings) you'll do a fantastic job; remember that no-one can assess your performance, and almost everyone has an incentive to claim you've done great.

I'll admit that being a central banker is somewhat more difficult than that: you have to look deadly serious at all times, appear knowledgeable and be capable of speaking at length without really saying anything. Formidable qualities, but I will stick with infra-red vision.

At his first academic job in 1909 he fought a literal duel with swords against, of all people, the librarian, because he wouldn’t make books available to his students. The librarian got an honorable scar out of it, and the two became the best of friends.

Deirdre McCloskey has more on Schumpeter, Galbraith, and the importance of rhetoric. There's also more than a grain of truth in this statement:

“The emotional attachment to the social order,” wrote [Schumpeter], was “the very thing capitalism is constitutionally unable to produce.” No one loves a Rockefeller. Everyone loves a Virgin Queen.

So says John Ioannidis in a short and highly readable article in PLoS Medicine (free access). He postulates that the probability of research findings being wrong is higher when:

1. The sample sizes are small2. The estimated effects are small3. There is flexibility in research design, definitions, outcomes etc4. There are financial or other interests and prejudices5. The scientific field is 'hot'. i.e. many scientific teams work against the clock to beat the competition.

He is right, but there is less to his thesis than meets the eye.

1. Not all scientific findings are born equal. Just because a few new papers based on a handful of observations have been published claiming X has an effect on Y does not mean that their findings are accepted as the God-given truth. Some papers are more convincing than others, and readers will apply a probability that any research finding is wrong. The five factors above do increase the probability that a published finding is wrong, but they also increase the probability the results will be taken with a pinch of salt.

2. Small effects are rarely important in a 'practical' sense - as economists would say, small effects are unlikely to have important 'policy implications'. The probability that a finding is 'false' diminishes when the estimated effect is large (as per Ioannidis's second corrolary). Even if you argue that scientific results are often consumed by readers that are unable to critically assess them, it is unlikely that findings which are 'wrong' will have damaging consequences.

To cut a long story short, most research findings are indeed wrong. But is the number of false findings divided by the total number of findings saying much? Simply weigh these findings by their credibility and importance, and the world of scientific discovery looks rosy again.

Long before Andy Warhol, Théodore Duret established the principle that prices provide evidence of artistic success. What is disappointing, however, is how poor the quality of the art world’s economic discourse remains even in the post-Warhol era. It continues to be fashionable among many critics and scholars to claim that art markets are irrational, and that prices have no value as indicators of artistic importance. These claims are both ignorant and foolish. Art scholars must overcome their distaste for economics (emphasis mine), and become more sophisticated in examining how changes in art markets have influenced artists’ attitudes and behavior.

The problem with valuing art is that art is not for sale: it's non-rivarlous and non-excludable. Art relates purely to the idea, not the material. Any half-decent colour printer can churn out an exact copy of the Mona Lisa (let alone the Warhol images), and an exact replica of the Aphrodite of Milos will cost you next to nothing compared to what the Louvre would ask for the original. And I won't even go to Duchamp's urinal.

So what do collectors pay for? Mainly, they pay for symbolism. And symbolism is politics, not art. An object's price is a very weak predictor of its artistic value.

This is not to say that art and economics are orthogonal to each other. Prices dramatically 'influence the attitudes and behaviors of artists' - and thus the art of the present and of the future - and deserve to be taken as seriously by art scholars as by the artists' themselves.

[F]inancing additional government spending by an across the board rise in all marginal tax rates would make the cost per dollar of government spending equal to $1.76.

[This fact] should be central to any consideration of tax policy. And yet it is not.

Megan's bottomline, in a post entitled 'Substantive arguments against tax increases': At the very least, it's the sort of thing you have to factor into arguments that we as a nation can save money via nationalised health care . . .

Tyler's bottomline: Cram all those numbers together into your noggin' and keep them there.

Will Wilkinson's bottom line: It is possible thatthe state can make its citizens better off by taking $1.76 to spend $1.00, if those very expensive dollar bills are spent on highly valuable public goods folks can’t coordinate to provide privately. But I reckon this kind of bona fide public good is a pretty small part of the existing budget.

A guy likes consuming apples and oranges. You know that each apple adds, say, 3 'units' to his utility, and you have no idea how much utility he derives from an orange. You know that each orange costs 1.87 apples. Is there anything in this setup that suggests that the guy should sell oranges and buy apples to increase his utility?

Citing an estimate of how much a dollar of government spending costs is not an argument, let alone a substantive one, for lower taxes: how much is what it's buying worth? Voting does not produce a welfare maximising result, so it may well be the case that a benevolent, fully informed, infinitely wise dictator would have the government raise way more tax (and spend way more) than it currently does, even at a cost of $17.6 per dollar of government spending. Given the massive scope for disagreement on the societal value of government spending, any disagreements on the dead-weight loss of taxation amount to small change.

In the absence of an estimate of the value of government spending, using the $1.76 to the dollar figure to support the case for tax-cuts would imply that there are cheaper sources of funds for government services, and thus we are overpaying for them. But what other way is there to raise money to finance redistribution (one of the main things government does, via progressive taxation and programmes that are of more value to the poor) or the military?

These are not profit making activities, and thus cannot be financed by raising capital in the market; so tax it has to be.

The above do not imply that Feldstein's estimates are useless. They would be relevant if presented alongside an estimate of the value of government spending, or with reference to government activities that could be financed via means other than taxation - this class of activities could include, for example, building a bridge or operating an airline. If raising a dollar for a 'commercial' venture in the market costs less than raising it via taxation, go for it - this is a point that reasonable people stopped arguing about a long time ago. Government should only do what the private sector can't, not only because 'governments are useless', but also because raising funds via taxation costs more than doing it via the market - when the latter is an option that is.

Postscript: To Megan: A nation ('the economy') saves money via a public system of health care if it costs less than other means that would achieve the same level of redistribution. Because nationalising health care is mainly about redistribution. The resource costs of actually delivering health-care are secondary in importance.

To Will, from one of Tyler's commenters: 'by expenditure, the two biggest programs by far are: Defense (it should be listed as Numero Uno: if you include all defense-related items from other programs, it is close to twice the regular budget figure) and of course Social Security. Put together, if we include the expanded definition of defense spending, that's over half of the federal budget. Add Medicare, Medicaid, and debt service, and you're over 80% of all federal spending.'

In Freakonomics, Steven Levitt documents how he identified teachers that massaged their students' test results to make them look better. This paper (free access, but (quick) registration required) suggests that some developing countries might also be giving their figures a little boost:

[...] we present a technique for assessing data quality based on conformity with Benford's Law, which states that the first digits of numbers generated from natural phenomena do not occur with equal frequency. If data do not conform to the Benford distribution, then questions arise about the process that generated it.

Benford's Law is applied to one of the most commonly used data sets in economics: international macroeconomic statistics. We find that the World Bank international GDP data and purchasing power parity (PPP) corrected Penn World tables for OECD countries conform well to Benford's Law. But some subsets of the data – particularly GDP figures from the developing world -- show non-conformity consistent with deliberate manipulation of the underlying series.

The results are suggestive only; Benford's law is not terribly well understood, and it is difficult to assess the properties of the test used by the authors before more research is carried out - this is virgin territory for economists. That said, for practitioners of the most inquisitive and cynical of professions, this could prove to be an invaluable statistic.

The excellent aspect between the moon in Virgo and Venus could have you rethinking your day. Sometimes the easiest options that require the least effort aren’t always the way to go. A little creative thinking will help you work out which way is best. (horoscope.com)

There is never a good time to deliver bad news, but you can be compassionate. (yahoo!)

Now is a good time to have a frank discussion with someone who's been upsetting you lately. Be honest, but try not to get too emotional... (Facebook)

Reading the horoscope is a very popular activity, even amongst people you'd think would know better. And if you are too quick to dismiss it all as being a load of bull, then you may be suffering from bias blind spot - the tendency not to compensate for one's cognitive biases.

To start with, reading the horoscope can compensate for the ambiguity effect — the avoidance of options for which missing information makes the probability seem "unknown". Advice such as 'now is a good time to have a frank discussion...' can work wonders for your status quo bias - the tendency for people to like things to stay relatively the same. And to cap it all, individuals tend to be risk-averse. This way, they attain suboptimal outcomes over long time periods (such as a lifetime). Reading the horoscope, and believing it is somewhat grounded on reality, means that the perceived risk of any course of action is now lower, leading to superior outcomes (a higher expected utility value).

But, I hear you say, what if my horoscope prescribes a course of action I know to be wrong? Well, horoscopes are hardly clear in their predictions and the advice they prescribe; and you need to remember that humans come with built-in selective perception — the tendency for expectations to affect perception - and confirmation bias — the tendency to search for or interpret information in a way that confirms one's preconceptions. The information you get from reading your horoscope will not fundamentally change your beliefs or make you do something you strongly believe you shouldn't; but this won't stop it from lessening the biases mentioned in the previous paragraph.

Of course, a requisite step is to actually believe in what you are reading - if you can't help but discard it out of hand it probably won't be much use. But next time you spot your partner browsing the net for this week's horoscope, be nicer: they are hard at work overcoming bias.

The second album (as I said before, in chronological order) in my list of greatest albums is Dream Theater's 1995 EP 'A Change of Seasons'. Unfortunately, I could only locate a four-part video with the full 23 minutes of the title track on youtube, so here is the first six minutes followed by links to the rest:

In this economist's humble opinion, Dream Theater is the most super of super-groups in the history of rock, and arguably the best band ever to walk the planet. Here's the official website, and what Wikipedia has to say about them.

And check this guy out - simply excellent, never seen anyone more deserving of a real drumkit.

Last Sunday's Times Money section included a section with Simon Jordan. He's 39 now and reveals that he made around £10m last year, having built a fortune of around £36m from scratch by the age of 32. When asked about his worst ever investment, he said financially it's the purchase and subsequent investment in Crystal Palace football club, originally bought for £11m but then he's spent about £24m on it since for a total of £35m. At current market value, if Aston Villa, one of the most successful English football teams of all time (in terms of League wins) and with a large, established fan catchment area cost under £60m, then I doubt Crystal Palace, with no history, no fans, no top-flight status and little chance of promotion are worth much more than the original £11m spent on them. Yet Simon Jordan says that "emotionally" Crystal Palace was his best ever investment.

This reminded me that this blog has covered the topic of investment in sports teams. The previous post explained the relatively straightforward phenomenon of wealthy individuals (such as Simon Jordan) investing in sports teams in cases where they could receive part of their “return” as a non-financial return, such as increased celebrity or utility from improving the teams they supported as children.

However, in England over the last couple of years there have been a number of cases where football clubs have been bid for or acquired by individuals or investment funds that have an exclusive aim of generating a financial return, with little or no scope for non-financial utility gains. In some cases the investment was even likely to be associated with substantial disutility, in particular with Malcolm Glazer, who bought Manchester United, becoming possibly the most hated man in the country and receiving numerous death threats. This poses the more interesting question of how and why these investors think they can get sufficient returns investing in English football clubs to exceed the returns they could have achieved on competing investments and the disutility from being hated by unwelcoming English football fans?

In the case of Malcolm Glazer’s purchase of Manchester United, this makes perfect sense as an investment. Based on my interpretation of Warren Buffett’s investment criteria, Man Utd is the best Buffet share I’ve seen amongst English companies with market values above £500m. The major factor input is a resilient intangible that has appreciated strongly over time without requirement for significant investment, i.e. the Man Utd brand. This has proved resilient to the relatively mediocre form between the Busby Babes and United’s all-conquering team of the 1990s and I’m always surprised when visiting continents outside of Europe to see the Manchester United team shirt as the most ubiquitous around the World, even ahead of the Brazilian national strip. To this classic Buffett company, Glazer added the private equity techniques discussed previously on this blog to leverage his upside in a conventional leveraged buy-out to make a deal with all the ingredients for success (until spoilt with a ridiculous and unnecessary transfer spend this summer).

Beyond Malcolm Glazer, I don’t understand any of the other return-seeking bids for or purchases of English football teams. Famously very few individuals have made any money out of investing in football, led by David Dein (who is rumoured to have once made a round-trip to Scotland to buy a single Arsenal share from an old widow), Alan Sugar (who supposedly made money at Spurs despite publicly suggesting it was a labour of love) and Ken Bates (who was close to losing his whole investment before Roman Abramovich bought Chelsea and who may now have overall lost money in football following his involvement with twice-bankrupt Leeds United). Even Doug Ellis was reported to only have achieved capital appreciation at Aston Villa just under the rate of RPI inflation during his 38-year involvement.

So why are the new investors coming in? They presumably think they will generate a financial return, but I put this down to herding instincts similar to those that led so many investors into dotcom companies in the late 1990s. My record on predictions on this blog is appalling, running at 0% (0 out of 1), but in an attempt to get up to 50%, I predict that investors getting into English football for financial return will probably leave in a few years' time having made substantial losses.

I want you to know that I love evolutionary psychologists, because the ideas, like “girls prefer pink because they need to be better at hunting berries” are so much fun. Sure there are problems, like, we don’t know a lot about life in the pleistocene period through which humans evolved; their claims sound a bit like “just so” stories, relying on their own internal, circular logic; the existing evidence for genetic influence on behaviour, emotion, and cognition, is coarse; they only pick the behaviours which they think they can explain while leaving the rest; and they get themselves in massive trouble as soon as they go beyond examining broad categories of human behaviors across societies and cultures, becoming crassly ethnocentric. But that doesn’t stop me enjoying their ideas.

This is Ben Goldacre, saying it beautifully. He's not making the berries thing up. Read the whole thing.

A reader asks me to list my favourite music albums of all time. There are three that stand above the rest, and I will post on all of them over the next week in chronological order. Here's the first one, Jethro Tull's Thick as a Brick, from the band's '78 Madison Sq Garden performance:

A new study by a US university has apparently confirmed for the first time that bird flu has been transmitted from human to human.

Researchers from the University of Washington have studied the case of a woman on the Indonesian island of Sumatra who caught the H5N1 bird flu virus from poultry in May last year. Professor Ira Longini, who led the research, says they have confirmed that not only did she pass the virus on to her 10-year-old nephew, it was then transmitted to other relatives. Seven of eight family members who caught the disease were soon dead.

"This proves there is person-to-person transmission in this case, in that setting, in Indonesia, northern Sumatra," he said. Professor Longini says this shows there is a serious threat of a bird flu pandemic. "It could happen and will happen eventually, and this simply confirms this particular H5N1 virus is capable of person-to-person transmission," he said. "We're going to see strains of influenza that are capable of causing pandemics arising, probably avian strains, and that will happen for sure, there's no doubt about it."

Professor Longini says in this case, a pandemic may have been averted because of the quick action of health authorities or, statistically at least, it could have been luck. He said because the sample group was so small, it was impossible to say how fast the disease could have spread in the workplace or the street. But he says that in the home, it was a fast mover. "It had about a one-third chance of transmitting from person to person due to close contact in that household setting," he said.

This is my last art project I did in high school before graduating. It's part of a contest involving drawings of the hands. The winner gets published in a greeting card that is sent by the company to all its customers. I almost won. I think it was going to be either mine or my fellow classmate Maggie Sather, and they picked hers, to make her the winner two years in a row.

Indifference Merv recently wrote that non-smokers supporting the smoking ban is the equivalent of turkeys voting for Christmas. His argument is simple: whatever the 'negative externalities' associated with second-hand smoke, smokers compensate non-smokers handsomely for the costs they impose on them. In fact, the average non-smoker in the UK is no less than £135 better off each year as a result of taxes on tobacco.

Merv is absolutely right. In fact, his point applies much more widely.

In economics, saying that x generates a negative externality simply means that whenever someone does/produces/consumes x, he pisses off someone else (x could be harming that latter someone physically, or it could simply be that she objects to x on grounds of taste, morality etc). If you are looking to maximise social welfare and your solution to the externality is to ban x, the assumption has to be that the person(s) suffering from the externality are no less that infinitely pissed off.

Economists are often accused of knowing the price of everything and the value of nothing; in actual fact, economists know that nothing has a value of infinity, and there are very few things that society should keep pretending are absolutely invaluable (for example, the right of a citizen to not get murdered). Banning anything for which adequate compensation can be paid to those adversely affected is inefficient, and we would all be better off if we could ban less and tax more (and then perhaps returning the extra money by reducing income or corporation tax).

Look, for example, at the ban on fox-hunting. Now, a large part of the population believes that 'killing a fox is wrong'. 'Wrong' is a relative statement - and, for most people, fox hunting is near the bottom of the 'wrong' list. What if each dead fox meant 10 children in Africa could be vaccinated against deadly diseases? The fox-hunters would prefer taxation to an outright ban, and so would almost everyone else.

Or think of the (recently reformed) restrictions on pub opening times in England: did anyone in their right mind ever propose that allowing an establishment to operate beyond 11pm would carry a social cost of infinity? What about making large political donations?

Postscript 1: There are some generic cases where taxation can be no alternative to outright prohibition. One is property crime: how can I possibly compensate you for the £100 I stole from you and be better off myself at the same time? Also, coercion of any type still ought to be illegal (if you could compensate someone for 'forcing' them to do something, how would that be coercion?), as should various behaviours involving minors.

Postscript 2: I have just come back to Athens from here (jealous, anyone?) I'm returning to London and regular blogging in a couple of days, but I thought I would drop by and say hi.

On the subject of Sir Mix-a-Lot, when I was on holiday in the US a couple of months ago, I caught an episode of Who wants to be a Millionaire. For $500, the question was: Which of these musicians was not knighted by the Queen: A) Sir Elton John B) Sir Mick Jagger C) Sir Paul McCartney or D) Sir Mix-a-Lot. The contestant didn't even consult the audience, immediately giving her answer as B)Sir Mick Jagger...

This is a quote from a cricket fan from the Test Match Special inbox on the BBC live text service cricket commentary during the last test match between India and England (a bore draw resulting in a series win for India).

Following on from "Cricket versus Baseball as an Engine of Growth", this quote is a fascinating insight into cricket and explains why it is unsuitable as an engine of growth to back up the empirical research on this issue. Whilst equivalent football discussion boards are full of vitriolic anger directed at the England manager and any player who hasn’t been outstanding for 90 minutes of every England match for the last 5 years, the official BBC live text commentary is full of running jokes and light-hearted banter. We’re mediocre at both sports so that doesn’t really explain the difference, so my best explanation is that cricket is an inherently chilled out Summer game in which at any given time only about 3 of the 22 players are actually doing anything much (unless you include fielding). Being so chilled out, those that play it tend to end up laid back to the point where we even saw our national vice-captain almost drown during the World Cup due to being too drunk to carefully man his pedalo at 3am in the morning less than 48 hours before a match.

More importantly though, this quote reminds me of an area of economics I'm not particularly comfortable with, which is that a lot of economic models seem to assume individuals are much brighter and more knowledgeable than they probably are.

Unfortunately, economics is a difficult subject involving a tricky mix of various branches of maths (lots of calculus, matrix algebra & stats), verbal skills, and the need for well-rounded knowledge and analytical skills to make sure you’re not missing something crucial on an issue (yet we all still often do). It’s also a subject dominated by heavyweight universities like Harvard & MIT and in which most major breakthroughs seem to come from an elite bunch of genius academics.

So it’s little wonder that the individuals driving the subject forward massively over-estimate the ability of most of the population. The average economics Nobel Prize winner probably doesn’t know many regular folk, spending most of their time with other highly intelligent academics and this selection bias leads them to build models where the core agents are like themselves, i.e. rational agents who build forward-looking expectations consistent with structural models of the economy whilst factoring in all knowable information.

I think we can be fairly confident that the basics still apply to our empty-handed Millionaire contestant, e.g. if you charge more for a good they want less of it, bundles of average amounts of products are preferred to extremes, etc. However, many economic models go further, e.g. with agents forming forward-looking expectations consistent with the structural parameters of the economy, or agents being able to act optimally in infinitely repeated games with uncertainty, so even if this accurately models all economists, how realistic is this across a full cross-section of society?

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This blog reflects my personal views and is in no way representative of those of my employer or my mum. To make sure no misunderstanding arises and their lives stay stress-free, I will remain anonymous.